§ Statement of Purpose

The View from 1776 presents a framework to understand present-day issues from the viewpoint of the colonists who fought for American independence in 1776 and wrote the Constitution in 1787. Knowing and preserving those understandings, what might be called the unwritten constitution of our nation, is vital to preserving constitutional government. Without them, the bare words of the Constitution are just a Rorschach ink-blot that politicians, educators, and judges can interpret to mean anything they wish.

"We have no government armed with the power capable of contending with human passions, unbridled by morality and true religion. Our constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other." John Adams, to the Officers of the First Brigade, Third Division, Massachusetts Militia, October 11, 1798.

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§ Decline of Western Civilization: a Snapshot

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Tuesday, January 12, 2010

The Stimulus Bubble

President Obama is considering another round of stimulus spending. In addition to failing to correct unemployment, stimulus spending foments speculative investment in limited sectors of the economy, setting the stage for the next economic bubble burst.

All socialistic planning measures to offset unemployment, including creation of fiat money by the Federal Reserve, are inflationary stimulus spending. Government’s direct stimulus spending just adds to the Federal debt and encourages consumers to go further into debt, rather than paying off the excessive debt that got them into trouble to begin with.

In its early stage, inflation induced by stimulus spending is usually manifested by over-expansion in single sectors of the economy, at rates in excess of normal underlying demand. Green jobs, a current target of Federal regulations and stimulus spending, are likely to be part of the next bubble.

Over succeeding months the effects of excess money begin to appear in a broader range of economic activity. Commodity prices usually are the first to begin rising, as they now are, followed by basic and intermediate industrial products, and ultimately consumer goods. In simplest terms, the amount of money available in the economy will have increased faster than overall increases in production, with the result that prices in general rise. This is inflation.

If the general level of prices, including interest rates (the price of money), rises rapidly, the effect is a degree of the stagflation that battered us in the 1970s. High unemployment is accompanied by harrowing increases in the cost of living.

More often the result is an inflation-produced bubble that attracts far too many people into jobs in speculative sectors, a misallocation of economic resources that makes recovery from subsequent unemployment more difficult, as we see today.

In the 1990s, inflation-impelled speculation caused a vast misallocation of resources in dot-com related companies. When the the bubble burst during the Clinton administration, it was estimated, for example, that fiber optic cable production capacity was roughly ten times the capacity needed in stabilized conditions. Dot-com start-up companies looked promising when the Fed flooded the economy with fiat money, fostering the expectation that demand would continue climbing. But they became losers when the Fed had to reduce the money supply, raising interest rates thereby.

Similarly, the housing bubble that collided with economic reality in 2007 was fueled by too much consumer debt floating on Federal deficit spending and the Fed’s profligate money creation. Many of the jobs created by the Fed’s money supply expansion will not be coming back, even when the economy finally stabilizes despite government’s destructive intervention.

More than 20% of today’s 7.2 million total job losses were in occupations related to housing construction (see Wall Street Journal, Even in a Recovery, Some Jobs Won’t Return, January 12, 2010). Job losses in the financial sector, which funded the housing boom - 548,000 - were almost 8% of the total.

Those excessive numbers of jobs in speculative sectors of the economy would never have existed if the Fed had concentrated upon central banks’ primary function: maintenance of a stable currency. Instead, the Fed has throughout its history pursued the liberal-progressive-socialist dream of a centrally managed economy in which the first criterion is socialistic social justice: equal distribution of income and wealth, without regard to economic reality or to people’s real contributions to the general welfare.

Government stimulus spending does nothing at all to correct the underlying over-allocation of resources into speculative economic sectors. Cash-for-clunkers created a quick blip for auto sales, followed by a sharp drop, along with a diminished number of used cars that might have been bought by lower-income citizens. Similarly, tax breaks designed to lure people into unwise mortgage debt on home purchases have contributed to volatility in housing sales.

Such stimulus spending also repeats the original problem by attracting far too many people into short-lived jobs or into so-call green jobs far in excess of what a stabilized economy will support. Liberal-progressives want all Americans to drive small, expensive, battery-powered automobiles. But forcing Government Motors to concentrate production on green vehicles isn’t going to make that an economic success, particularly when there is almost no profit margin on such cars and demand for them is a small fraction of the total automobile and truck market. Meanwhile companies such as General Electric are jumping onto the green bandwagon, expecting that EPA regulations and/or cap-and-trade legislation will distort demand for green products.

Stimulus spending is not a substitute for real economic activity that produces real goods that people want on a sustained basis. The only lasting results are even more inflationary fiat money in the economy and, of course, enhanced re-election prospects for politicians. In the Obama administration’s case, stimulus spending was designed entirely for political purposes: to support socialistic labor unions and to funnel money into blue states.